Weekly Market Recap (08-12 January)

<p>Monday</p><p>Fed’s Logan (hawk
– non voter) over the weekend said that the Fed shouldn’t rule out another rate
hike given the recent easing in financial conditions and added that it’s
appropriate to consider a slowdown in the pace of the Fed’s balance sheet
runoff (although we knew that already from the recent FOMC Minutes):</p><ul><li>We shouldn't rule
out rate hike given recent easing in financial conditions.</li><li>Premature easing of
financial conditions could allow demand to pick back up.</li><li>If we don't maintain
sufficiently tight conditions, there is a risk inflation will pick back
up, reversing progress.</li><li>Appropriate to
consider parameters to guide decision to slow Fed's balance sheet runoff.</li><li>Labor market 'still
tight' but continues to rebalance.</li><li>Financial system
overall has 'more than ample' bank reserves and liquidity, though no
longer 'super abundant'.</li><li>Inflation in a 'much
better place' than last January but Fed's job is not yet complete.</li><li>We should slow the
pace of asset runoff as the Fed's overnight reverse repurchase balances
approach a low level.</li></ul><p>Saudi Aramco over the
weekend announced that it would cut its crude prices to all regions. The
official selling price for the Arab Light crude to Asia fell to the lowest
level in 27 months. This has renewed concerns around demand and led to a
selloff on Monday. </p><p>The Switzerland December CPI
beat expectations:</p><ul><li>CPI Y/Y 1.7% vs.
1.5% expected and 1.4% prior.</li><li>CPI M/M 0.0% vs.
-0.2% expected and -0.2% prior.</li><li>Core CPI Y/Y 1.5% vs.
1.4% prior.</li></ul><p>The Eurozone November
Retail Sales came in line with expectations:</p><ul><li>Retail Sales M/M -0.3%
vs. -0.3% expected and 0.4% prior (revised from 0.1%).</li><li>Retail Sales Y/Y
-1.1% vs. -1.5% expected and -0.8% prior (revised from -1.2%).</li></ul><p>The NY Fed released its
December inflation expectations survey:</p><ul><li>1-year seen at 3.0%
vs. 3.4% prior.</li><li>Three years seen at
2.6% vs. 3.0% prior.</li><li>Five years seen at
2.5% vs. 2.7% prior.</li><li>Median expected home
price change 3.0% vs. 3.0% prior.</li></ul><p>Fed’s Bostic (hawk –
voter) sees a soft landing ahead with much less and much later rate cuts:</p><ul><li>Rise in unemployment
would be far less than would be typical in the case given the reduction in
inflation.</li><li>Fed is in a very
strong position right now.</li><li>Fed can let
restrictive policy continue to work to slow down inflation; expect the
process will remain 'orderly'.</li><li>Families are
catching up to past price increases. </li><li>Pain of higher
prices is easing, and sentiment should follow.</li><li>Goods inflation is
back to pre-pandemic levels.</li><li>Services inflation
is moving more slowly and not expecting big drops.</li><li>Many economic
measures are back at levels seen in the years immediately before the
pandemic.</li><li>At this point
shorter-term measures of inflation, such as over three and six months, are
more important. They are
pointing in a positive direction.</li><li>Not comfortable
declaring victory. Fed needs to 'remain diligent' and 'short run
attentive’.</li><li>Top line job numbers
have been pretty strong.</li><li>The recent strength
in jobs has been focused in a relatively small part of the economy.</li><li>Concentrated job
growth means that slowing is occurring. Question is if job growth overall
falls off a cliff.</li><li>Sees two quarter
point rate cuts by the end of the year (the Fed forecast 80 basis points
of cut in their most recent dot-plot).</li><li>Risks are balanced
with employment slowing, but inflation still above target. Bias is still to stay tight.</li><li>Policy will still
need to be restrictive at the end of the year, but progress on inflation
will warrant lower rates.</li><li>Wants to be sure
that inflation control is 'really, really' there before taking too many
steps.</li><li>Outlook now is not
for inflation to rebound, but Fed still needs to pay attention.</li><li>Repeats that he sees
an initial rate cut in Q3.</li><li>Plans to work with
team over the next six months to get a better view of how balance sheet
policy should evolve.</li><li>Businesses say that
hiring practices are normalizing as is the ability to pass along price
increases.</li><li>Labor market risks
are much more balanced; many sectors not showing growth.</li><li>Inflation and
employment mandates are not yet in conflict.</li><li>Labor markets remain
strong in the aggregate and suggest continued momentum in the economy.</li></ul><p>Tuesday</p><p>Fed’s Bowman (hawk –
voter) basically echoed what Fed’s Logan and Fed’s Bostic said as the FOMC is
laying out the groundwork for a reduction in rates:</p><ul><li>Inflation could fall
further with policy rate held steady for some time.</li><li>Current policy
stance appears sufficiently restrictive.</li><li>It will eventually
become appropriate to lower Fed’s policy rate, should inflation fall
closer to 2%.</li><li>Labor market supply
and demand coming into better balance.</li><li>Upside inflation
risks remain, including geopolitical and easing financial conditions.</li><li>I will remain
cautious in my approach to considering changes to Fed policy rate.</li><li>Remain willing to
raise policy rate at a future Fed meeting, should inflation progress stall
or reverse.</li><li>Climate guidance
from banking regulators diverts resources from core financial risks.</li></ul><p>The Tokyo December CPI
eased further although the Core-Core measure remains stuck at cycle highs:</p><ul><li>CPI Y/Y 2.4% vs. 2.6%
prior.</li><li>Core CPI Y/Y 2.1% vs.
2.1% expected and 2.3% prior.</li><li>Core-Core CPI Y/Y 2.7% vs. 2.7% prior. </li></ul><p>The Australian November Retail
Sales beat expectations by a big margin:</p><ul><li>Retail Sales M/M
2.0% vs. 1.2% expected and -0.4% prior (revised from -0.2%).</li><li>Retail Sales Y/Y 2.2%
vs. 1.2% prior.</li></ul><p>The Switzerland December non-seasonally
adjusted Unemployment Rate ticked higher:</p><ul><li>Unemployment Rate non
s.a. 2.3% vs. 2.1% prior.</li><li>Unemployment Rate s.a.
2.2% vs. 2.2% expected and 2.1% prior.</li></ul><p>The Eurozone November
Unemployment Rate ticked lower:</p><ul><li>Unemployment Rate 6.4%
vs. 6.5% expected and 6.5% prior.</li></ul><p>The December US NFIB
Small Business Optimism Index improved:</p><ul><li>NFIB 91.9 vs. 90.6 prior.</li></ul><p>This is
the 24th straight month that the index remains below the 50-year moving average
of 98. NFIB notes that small businesses remain very pessimistic about the
outlook coming into this year, with 23% of firms reporting inflation to be
their single-most important problem in business operations – up 1% from
November. Adding that while 2023 is now "in the rearview mirror, it will
weigh heavily on the 2024 economy".</p><p>ECB’s Villeroy (neutral –
voter) just repeated what we already knew:</p><ul><li>Barring any
surprises, 2024 will be the year of our first rate cut.</li><li>Our decision will be
based on data.</li><li>ECB will not be
stubborn; we won't be rushed.</li><li>We will cut rates
this year when inflation expectations are solidly anchored at 2%.</li></ul><p>ECB’s Centeno (dove – non
voter) expects rate cuts to come sooner than expected due to a fast easing in
inflationary pressures:</p><ul><li>Should not wait
until May to make a decision.</li><li>There are no signs
of additional pressure on inflation.</li><li>Rates have peaked.</li><li>Expects inflation to
have fallen to target in Q2.</li><li>The decision to keep
nominal rates steady for the moment is appropriate and we will decide when
to cut them sooner than we thought until recently.</li><li>I can't say when,
but I can … say the most recent developments on inflation and the
economy have obviously brought the moment of easing (of monetary policy)
closer.</li></ul><p>Wednesday</p><p>The Japanese November Wage
data came in much lower than expected which led to a strong selloff in the Yen
and a rally in the Nikkei index:</p><ul><li>Average Cash Earnings Y/Y
0.2% vs. 1.5% expected and 1.5% prior.</li><li>Real wages Y/Y -3.0%.</li></ul><p>The Australian December Monthly
CPI missed expectations:</p><ul><li>CPI Y/Y 4.3 vs. 4.4%
expected and 4.9% prior.</li><li>CPI M/M 0.4%.</li><li>Trimmed Mean CPI Y/Y
4.6% vs. 5.3% prior.</li></ul><p>Houthi terrorists launched the biggest attack to
date on merchant vessels in Red Sea. The U.S. Navy officials told CNBC that four warships
from Operation Prosperity Guardian were engaged in the fighting and
approximately 50 merchant vessels were in the area of the attack. Meanwhile,
shipping costs continue to rise as we see a rerouting of vessel traffic. </p><p>ECB’s de Guindos (neutral – voter) sees
disinflation slowing in the beginning of the year and added that economic
prospects are skewed to the downside:</p><ul><li>Rapid pace of
disinflation likely to slow down this year.</li><li>Disinflation process
to pause temporarily at the beginning of the year.</li><li>Growth developments
are more disappointing.</li><li>Incoming data
indicate that future remains uncertain, prospects tilted to the downside.</li></ul><p>ECB’s Schnabel (neutral – voter) maintained her
neutral stance and added that it's too early to discuss rate cuts:</p><ul><li>There is evidence
that sentiment indicators are bottoming out.</li><li>The near-term
economic outlook remains weak in line with our projections.</li><li>Financial conditions
have loosened more than projected, while energy prices have been weaker.</li><li>The drop in
unemployment to a historical low confirms continued strong resilience in
labour markets, which is broadly in line with the December 2023 staff
projections.</li><li>As inflation falls,
we continue to expect a gradual decline in wage growth in 2024.</li><li>Markets understand
well that our policy is data-dependent, and we have clearly defined the
elements of our reaction function.</li><li>Our projections
foresee inflation reaching our 2% target in 2025. So, we are on the right
track. Geopolitical tensions are one of the upside risks to inflation as
they could drive up energy prices or freight costs.That’s why we need to remain vigilant.</li><li>It's too early to discuss
rate cuts.</li><li>We expect inflation
to reach 2% in 2025 and project that we can achieve this without causing a
deep or prolonged recession.</li></ul><p>BoE’s Bailey (neutral – voter) just highlighted
the strength of the labour market and how it helped to weather the impact of
higher rates:</p><ul><li>It's important to
return UK inflation to target.</li><li>The UK hasn't seen a
jump in unemployment.</li><li>UK household incomes
have risen in recent months.</li><li>These factors
mitigate impact of higher rates.</li><li>The events in the
Middle East haven't yet had a big economic impact, watching closely.</li></ul><p>Fed’s Williams (neutral – voter) maintained his
neutral stance highlighting the need to keep a restrictive policy for some
time:</p><ul><li>Our work to bring
inflation back to 2% is not done.</li><li>Fed can cut rates
when confident inflation moving to 2%.</li><li>Fed will need
restrictive policy stance for some time.</li><li>Outlook still
uncertain, rate decision to be made meeting-by-meeting.</li><li>Rare decisions will
be driven by totality of data.</li><li>Risks to economy are
two sided.</li><li>In 2024 sees GDP at
around 1.25%, unemployment at 4%.</li><li>Sees inflation
ebbing to 2.25% in 2024, and 2% in 2025.</li><li>Things are looking
very good on jobs front.</li><li>Inflation situation
has improved quite a bit.</li><li>Fed sees
'meaningful' progress in restoring economic balance.</li><li>Balance sheet wind
down working as planned.</li><li>Fed not near point
where banking sector liquidity is scarce.</li><li>We're watching both
hard and anecdotal data for economic clues.</li><li>Fed must be ready to
react to unexpected events.</li><li>Inflation has been
coming down pretty quickly.</li><li>2023 big surprise
was the speed of inflation retreat.</li><li>Rate cut prospects
tied to how economy performs.</li><li>Not worried
inflation will get stuck at a high level.</li><li>Fed in ‘good place,’
has time to think about what’s next for rates.</li><li>Fed policy is still
quite restrictive.</li><li>Eventually Fed needs
to get policy back to more neutral levels.</li><li>Not surprised to see
some money market rate volatility.</li><li>Money market
volatility has not affected fed funds rate.</li><li>Demand for reserves
likely higher now relative to past.</li><li>Fed needs to think
this year about balance sheet end game.</li><li>Not caught up in
every twist of financial market shift.</li><li>Financial markets
highly reactive to new data.</li></ul><p>The SEC has finally
approved the Spot Bitcoin ETFs which began trading on Thursday.</p><p>ECB’s de Cos (dove – voter) highlighted the
risks around monetary policy stance, economic growth and inflation:</p><ul><li>Economic activity
has continued to show clear weakness and is only expected to increase its
degree of dynamism gradually.</li><li>In the third
quarter, GDP decreased by 0.1% and available indicators suggest stagnation
in the fourth.</li><li>Risks to economic
growth remain skewed to the downside.</li><li>The recent slowdown
in prices is expected to continue in the coming quarters.</li><li>Although in 2024 the
decline will be slower due to upward base effects and the gradual
withdrawal of fiscal measures adopted during the energy crisis.</li><li>In addition to
geopolitical developments, the transmission of monetary policy has been surprising
us for its strength, which, if extended in the coming years, would
translate into lower growth.</li><li>We’ll have to pay
attention in the coming months to different developments that may
condition the trajectory of inflation and, therefore, our monetary policy
action. </li><li>The high level of
uncertainty means that we must remain very vigilant to avoid both
insufficient tightening, which would prevent the achievement of our
inflation target, and excessive tightening, which would unnecessarily harm
activity and employment.</li></ul><p>Thursday</p><p>Jiji reported that the BoJ is considering
lowering the price outlook for fiscal year 2024 to middle 2% range. In the
latest outlook report for October last year, the BoJ noted the projection for
prices for the fiscal year 2024 to be around 2.7% to 3.1%. </p><p>The December US CPI report beat expectations:</p><ul><li>CPI Y/Y 3.4% vs.
3.2% expected and 3.1% prior.</li><li>CPI M/M 0.3 vs. 0.2%
expected and 0.1% prior. </li><li>Core CPI Y/Y 3.9%
vs. 3.8% expected and 4.0% prior.</li><li>Core CPI M/M 0.3%
vs. 0.3% expected and 0.3% prior.</li><li>Shelter M/M 0.4% vs.
0.4% prior.</li><li>Shelter Y/Y 6.2% vs.
6.5% prior.</li><li>Services less rent
of shelter M/M 0.6% vs. 0.6% prior.</li><li>Core services ex
housing M/M 0.4% vs. 0.4% prior.</li><li>Real weekly earnings
-0.2% vs. 0.5% prior.</li></ul><p>The US Jobless Claims beat expectations across
the board:</p><ul><li>Initial Claims 202K
vs. 210K expected and 203K prior (revised from 202K).</li><li>Continuing Claims
1834K vs. 1871K expected and 1855 prior (revised from 1868K).</li></ul><p>Fed’s Mester (hawk – voter) said that the
December CPI report didn’t change her view and that a rate cut in March is too
early:</p><ul><li>December CPI report
shows the job is not done yet.</li><li>Today's inflation
report doesn't change my view on where the Fed is headed.</li><li>Forecasts that we
will continue to see inflation fall this year.</li><li>We will not get to
2% target this year.</li><li>The Fed is in a good
spot to assess as data comes in.</li><li>This report doesn't
tell us that inflation progress has stalled out, but it tells us we have
more work to do.</li><li>Contacts say labour
market is still tight but not as tight as before.</li><li>March is too early
for rate cuts, in my estimation.</li><li>We are not there yet
to cut rates; we want more evidence the economy is progressing as expected.</li></ul><p>Fed’s Barkin (neutral – voter) is not yet
convinced that inflation is heading back to target as he would like to see a
broader improvement:</p><ul><li>I'm looking to be
convinced that inflation is headed to target.</li><li>Improvement on
inflation is still pretty narrow and focused on goods.</li><li>Says he's open to
lowering rates once inflation is on track to 2%.</li><li>Conceivable that
banks want to hold more liquidity than they did before the pandemic.</li><li>Still seeing
moderation in overall level of inflation but still a 'disconnect' with
services and shelter.</li><li>Would have more
confidence if improvement in inflation was broader.</li><li>Progress on goods
has been encouraging and could make the case that it could continue.</li><li>Some businesses in service
sector have found they have pricing power and will not give it up until
there is pushback from consumers and competitors.</li></ul><p>ECB’s Lagarde (neutral – voter) didn’t offer
anything new on the policy outlook as she just reaffirmed that rates have
reached their peak and she cannot give a date on when interest rates may go
down:</p><ul><li>We are winning a
battle at the moment.</li><li>I think we have
passed the hardest and worst bit of inflation.</li><li>That doesn't mean we
will have a smooth inflation decline.</li><li>I see eurozone
inflation at 1.9% in 2025.</li><li>I cannot give a date
when interest rates may go down.</li><li>I think rates have
reached their peak.</li></ul><p>Fed’s Goolsbee (dove – non voter) echoed his
colleagues in calling the December CPI report as close to their expectations
and therefore not a gamechanger:</p><ul><li>December services
inflation was a little more favourable than expected.</li><li>2023 was a 'hall of
fame' year on inflation reduction.</li><li>Overall CPI
inflation in December was pretty close to what was expected.</li><li>Housing inflation
was a little less favourable than expected.</li><li>Persistently high
shelter inflation CPI may have less implication for Fed's personal
consumption expenditures target.</li><li>Inflation will be
the primary determinant of when and how much interest rates should be cut.</li><li>The Fed still has
weeks and months of data to come.</li><li>Can't answer the
question of what we'll do at March meeting without data.</li><li>Fed so far is on
golden path, though it could be derailed.</li><li>Unlike a year ago,
the risks to golden path are on both sides.</li><li>Risks include
persistent housing inflation, potential supply shocks.</li></ul><p>Friday</p><p>The US and UK launched strikes from the air and
the sea against Houthi military targets in Yemen in response to the attacks on
ships in the Red Sea. The United States Embassy in Iraq was bombed shortly
after reports that the United States and Britain had begun striking Houthi
targets in Yemen. Crude oil prices started to climb in the aftermath with the
market fearing a larger escalation.</p><p>The Chinese December CPI report missed
expectations:</p><ul><li>CPI Y/Y -0.3 vs. -0.4%
expected and -0.5% prior.</li><li>CPI M/M 0.1% vs. 0.2%
expected and -0.5% prior.</li><li>Core CPI Y/Y 0.6% vs.
0.6% prior.</li><li>Core CPI M/M 0.1% vs. -0.3% prior.</li></ul><p>The UK November Monthly GDP beat expectations:</p><ul><li>GDP 0.3% vs. 0.2%
expected and -0.3% prior.</li><li>Services output M/M
0.4%.</li><li>Industrial output M/M 0.3%.</li><li>Manufacturing output M/M 0.4%.</li><li>Construction output M/M -0.2%.</li></ul><p>The US December PPI report missed expectations
across the board:</p><ul><li>PPI Y/Y 1.0% vs.
1.3% expected and 0.8% prior (revised from 0.9%).</li><li>PPI M/M -0.1% vs. 0.1%
expected and -0.1% prior (revised from 0.0%).</li><li>Core PPI Y/Y 1.8% vs.
1.9% expected and 2.0% prior.</li><li>Core PPI M/M 0.0% vs.
0.2% expected and 0.0% prior.</li></ul><p>The highlights for next week will be:</p><ul><li>Monday: PBoC MLF, US Markets
closed for MLK Day, BoC Business Outlook Survey.</li><li>Tuesday: UK Labour Market
report, Canada CPI. </li><li>Wednesday: China Industrial
Production and Retail Sales, UK CPI, US Retail Sales, US Industrial Production,
US NAHB Housing Market Index.</li><li>Thursday: Australian Labour
Market report, US Building Permits and Housing Starts, US Jobless Claims, New
Zealand Manufacturing PMI. </li><li>Friday: Japan CPI, UK Retail
Sales, Canada Retail Sales, US University of Michigan Consumer Sentiment.</li></ul><p>That’s all folks. Have a nice weekend!</p>

This article was written by Giuseppe Dellamotta at www.forexlive.com.